Key Business Issue

Resurgence of the manufacturing industry

2012-05-28

The worst financial crisis since the Great Depression in the 1920s has once again pointed spotlight on the manufacturing sector. Advanced economies have increased assistance for manufacturers and stressed the importance of manufacturing. This is far different from the situation not long ago when the manufacturing industry’s share in the economy was shrinking and it no longer provided as many jobs as before. Once disparaged as a declining industry, the manufacturing sector appears to be regaining its past glory. Why the industry is seemingly enjoying a renaissance will be discussed today with Dr. Lee Geun-tae of the LG Economic Research Institute.

Interest in manufacturing is growing again. Since the 2008 global recession, formerly fast-growing transnational investment banks and the finance sector have suffered quite a devastating blow, while Apple and other manufacturing giants have notched considerable profits, breaking their misconception as money drainers. Even in Europe, Greece, Spain, and Portugal, the countries with service sector-oriented economies, are faltering fiscally, while Germany with its strong manufacturing industry is faring relatively well. Apparently, the United States and other advanced economies have learned a lesson from this and are realizing the importance of the manufacturing sector. The resurgence of manufacturers also has to do with the increasing role of developing countries in the global economic growth. Since developing countries lack a steady supply of durable goods and other essential products, their growing presence in the global economy means spiking demands for manufactured goods.

Compared to the 20th century, the manufacturing industry accounts for much less in the global GDP growth – 27% in 1970 to 17% in 2010. However, countries around the world are working to revamp their manufacturing industries. Prior to the global recession, the focus was on the service sector, but despite the worldwide economic slowdown, Apple, 3M, and other major manufacturing companies are showcasing stellar performances and the rapid growth of developing countries are attributed to their youthful manufacturing industries. Having posted negative growth in 2003 due to staggering unification and welfare costs, Germany enjoyed an export surge of 1 trillion euros last year driven by its manufacturers. As the world witnessed the manufacturing sector creating new jobs and boosting export, countries are once again seeking to become manufacturing giants. And speaking of a manufacturing giant, Korea used to be one.

I can’t emphasize enough the role the manufacturing industry played in Korea’s economic growth. Lacking in resources and land, Korea had to invest what little money and manpower it had to the manufacturing and export sectors, which led to the phenomenal growth in the 1970s and 80s. For the past four decades from 1970 to last year, the Korean manufacturing industry grew at a remarkable rate of more than 10% annually. The rapid growth of its manufacturing industry put Korea in the category of manufacturing-heavy nations. According to U.N. statistics, the Korean manufacturing industry ranks seventh in the world in size and sixth highest in the manufacturing vis-a-vis total GDP percentage.

Manufacturing was the power that drove the Korean economy, but it seems to have lost its steam in recent years. The average growth rate of the Korean manufacturing industry fell from 16% in the 1970s to 6% in the 2000s. Even worse, employment in the sector has plunged into the minus range since the 1990s. The number of workers in manufacturing companies continues to decline as plants automate to boost productivity and outperform their competitors and move to overseas locations to cut costs. At this rate one cannot help but be skeptical about the Korean manufacturers’ place in the national economy.

Although there are more jobs in the manufacturing industry worldwide, most of the jobs are concentrated in developing countries, while advanced economies still struggle with creating jobs in the manufacturing sector. Lately, however, wages in developing nations are rising too much and manufacturers in overseas locations experience too many disadvantages, causing labor-intensive businesses to stay in the country or even return from their overseas manufacturing bases. Another important reminder is that the manufacturing industry yields more per capita added value than the service industry. The larger the added value, the larger the share to the people in the forms of wages, profits, and interests. This can boost demands and help create jobs in other sectors as well.

The latest trend in advanced economies is re-shoring – bringing back manufacturing plants from overseas and building manufacturing facilities locally. Major American manufacturing giants such as GE, Ford, and Whirlpool have closed down their plants in China and reopened them in their home towns. Thanks to the re-shoring boom, the American manufacturing industry saw 328 thousand new jobs last year. Also, the countries with a manufacturing-heavy economic structure can better withstand and overcome such external shocks as the 2008 financial meltdown because their exports of manufacturing goods can prop up their economies. They are also better equipped to pioneer a new future, since manufacturing calls for constant technological innovation. Unfortunately for Korea, however, its automobile, steel, and shipbuilding industries are being quickly caught up by its competitors in China and India with their cheap comparables, all the while struggling to narrow the technological gap with the frontrunners. What should Korea do to meet this challenge?

It is true that Korea is facing strong competition from the latecomers like China and India, but Korea is still doing quite well in the world market. Despite the competition, Korean automobiles and electronics are taking up more and more market shares. Korea’s share in the world export market has steadily increased, from 2.8% in 2000 to 3.3% in 2010. It is undeniable that software, medicine, and other high value-added service businesses could make important growth engines, if they became more competitive than their foreign counterparts. But their presence in the economy is still not that great, despite the sector’s high growth, and thus incapable of powering the entire economy. Korea needs to make decisions on where to focus the nation’s limited production resources to keep its economy steady.

It has been confirmed through the global recession and Europe’s fiscal troubles that the manufacturing sector has been the only unshakable pillar sustaining the world economy. If Korea wants to bring another manufacturing boom, it should give tax breaks to manufacturers and attract more investments in the manufacturing sector. Korea’s manufacturers should be given incentives and assistance to bring back their glory days as the stalwart troops of economic growth.